Commerce Department Blacklists Additional Huawei Affiliates but Grants More Time to U.S. Businesses to Disengage from Huawei, Designated as a National Security Threat

Commerce Department Blacklists Additional Huawei Affiliates but Grants More Time to U.S. Businesses to Disengage from Huawei, Designated as a National Security Threat

Aug 28 2019

On August 19, 2019, the Department of Commerce Bureau of Industry and Security (“BIS”) announced that it has added 46 additional Huawei Technologies Co., Ltd. (“Huawei”) affiliates to its Entities List, bringing to over 100 the number of Huawei’s non-U.S. affiliates subject to Entity List restrictions. [1] However, although these restrictions make it harder for U.S. companies to transact business with Huawei and its affiliates, an existing general license authorizing certain specified transactions with these entities, due to expire on August 19, 2019, has been clarified and extended for an additional 90 days. [2]

The BIS Entity List identifies entities reasonably believed to be involved in, or pose a significant risk of being or becoming involved in, activities contrary to the national security or foreign policy interests of the U.S. [3] Prior to any export, reexport, or transfer (in-country) of items subject to the Export Administration Regulations (“EAR”) [4] to parties on the Entity List, the exporter must obtain a license from BIS approving the export or transfer. However, most license applications are subject to a presumption of denial. [5]

The Entity List export restrictions only apply to “items subject to the EAR” and do not apply to information and software that are (1) unclassified and available to the public without restrictions on its dissemination; (2) non-proprietary system definitions; or (3) appear in patents and published patent applications. [6] “Activities” that fall outside the scope of the EAR include the sending, taking, or storing of technology or software that is (i) unclassified, (ii) secured using ‘end-to-end encryption,’ (iii) secured using cryptographic modules compliant with FIPS 140-2, and (iv) not intentionally stored in a country listed in Country Group D:5 or in the Russian Federation.

Huawei was designated as a national security threat and placed on the Entity List, along with 68 of its non-U.S. affiliates, on May 21, 2019. However, on May 22, 2019, to mitigate the financial and logistical ramifications on U.S. companies resulting from the Entity List designation, particularly on rural companies, BIS issued a Temporary General License for 90 days until August 19, 2019 for certain limited transactions with Huawei and its 68 non-U.S. affiliates. [7] This temporary license restored previous EAR licensing requirements and policies in place before Huawei’s inclusion, authorizing certain continued transactions with the listed entities.

BIS has now extended this Temporary General License for an additional 90 days through November 18, 2019. In addition, BIS has clarified various aspects of the transactions with Huawei and its non-U.S. affiliates authorized under the Temporary General License. Although subject to certain exclusions detailed in the Temporary General License, the following activities are generally authorized:

1) Continued operation of existing networks and equipment, including software updates, subject to legally binding contracts/agreements executed on or before May 16, 2019;

2) Support to existing personal consumer electronic devices and Customer Premises Equipment (CPE) that were available to the public on or before May 16, 2019; and

3) Disclosure to Huawei and its non-U.S. affiliates of information regarding security vulnerabilities when related to the process of providing ongoing security research.

BIS has promised to publish additional guidance regarding the authorized transactions and any applicable exclusions.

Prior to any export, reexport, or transfer (in-country) pursuant to this temporary license of items subject to the EAR, the exporter, reexporter, or transferor must obtain a certification statement (and any additional support documentation needed to substantiate the certification statement) from the Huawei entity that will receive the items specifying how the requested action meets the scope of the temporary license.

As of the time of writing, Huawei’s U.S. subsidiary has not been targeted by the Department of Commerce. However, pursuant to Executive Order 13873, in which President Trump declared a national emergency with respect to foreign telecommunications equipment providers, the implications of future rules and regulations may lead to a more comprehensive ban on dealings with Huawei and all Huawei affiliates. [8]

In addition to more stringent restrictions against Huawei and its affiliates, other information and communications technology and service providers may be targeted. Executive Order 13873 prohibits any transaction if it (a) involves information and communications technology or services created or supplied by any affiliate of a foreign adversary and (b) poses an undue risk to the information and communications technology or services, critical infrastructure, digital economy, or national security of the United States. The term “transaction” is broadly defined as any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.

The expansive scope of the Executive Order allows the government considerable discretion to place additional, more comprehensive restrictions on Huawei and other information and communications technology and service providers. The Administration has shown its willingness to act consistently with the findings of the Executive Order. Earlier this month, the Administration issued a rule barring federal agencies from buying telecommunication equipment and services from Huawei, ZTE Corporation and other Chinese companies. [9] Going forward, more rules targeting additional Chinese entities, transactions with China in general, and perhaps entities from other countries such as Russia can reasonably be expected.

[4] Pursuant to 15 C.F.R. § 734.3 of the EAR, the following items are subject to the EAR:

(1) All items in the United States, including in a U.S. Foreign Trade Zone or moving in transit through the United States from one foreign country to another;

(2) All U.S. origin items wherever located;

(3) Foreign-made commodities that incorporate controlled U.S.-origin commodities, foreign-made commodities that are ‘bundled’ with controlled U.S.-origin software, foreign-made software that is commingled with controlled U.S.-origin software, and foreign-made technology that is commingled with controlled U.S.-origin technology:

(i) In any quantity, as described in § 734.4(a) of this part; or

(ii) In quantities exceeding the de minimis levels, as described in § 734.4(c) or § 734.4(d) of this part;

(4) Certain foreign-made direct products of U.S. origin technology or software, as described in § 736.2(b)(3) of the EAR. The term “direct product” means the immediate product (including processes and services) produced directly by the use of technology or software; and

(5) Certain commodities produced by any plant or major component of a plant located outside the United States that is a direct product of U.S.-origin technology or software, as described in § 736.2(b)(3) of the EAR.

[5] Noncompliance with EAR licensing requirements may result in criminal and/or civil penalties. Criminal penalties for violations can reach 20 years imprisonment and $1 million per violation, while administrative monetary penalties can reach $11,000 for each violation, and $120,000 per violation in cases involving items controlled for national security reasons, as is the case with Huawei.

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